Five Questions for Mario Draghi to Answer for You Today

ECB President Mario Draghi may have few tools left to mitigate the impact of geopolitical turmoil that European companies from Anheuser-Busch InBev NV to Siemens AG say is hurting their business. Photographer: Ralph Orlowski/Bloomberg

Aug. 7 (Bloomberg) -- Here are five questions for Mario
Draghi today. The European Central Bank president holds a press
conference at 2:30 p.m. in Frankfurt, 45 minutes after the
Governing Council’s announcement on interest rates.

Is any further policy action likely for now?

No, according to economists. While Draghi left the door
open to “little” adjustments after taking the benchmark rate
to a record-low 0.15 percent and the deposit rate negative in
June, all participants in a Bloomberg News survey say that the
ECB’s three official rates will stay unchanged at today’s
meeting. They also say that officials will keep borrowing costs
on hold in coming months, with the majority of economists in a
separate survey predicting a rate increase no earlier than 2016,
and only one in 28 analysts foreseeing a further cut in the
deposit rate.

One centerpiece policy of the central bank’s stimulus
announced in June has yet to take effect. The ECB’s program of
long-term loans for banks aimed at channeling as much as 1
trillion euros ($1.3 trillion) to the euro-area economy will
only begin in September and officials have indicated they will
refrain from further action until the impact of this is clear.
While Draghi said in July that officials are intensifying
preparations to buy asset-backed securities, analysts don’t
expect an announcement imminently.

How strong is the economic recovery?

In July, Draghi warned of “possible repercussions of
geopolitical risks” on the euro area’s “very gradual
recovery,” and he may expand on this commentary in today’s
opening statement in light of continuing hostilities in Ukraine
and sanctions on Russia by the European Union and U.S.

For now, economic statistics and business surveys suggest a
mixed picture in the past quarter, with Italy returning to
recession while Spain grew 0.6 percent. In the region’s largest
economy, Germany, factory orders dropped the most in more than 2
1/2 years in June, though a composite indicator of industrial
and services activity across the euro region is close to highest
level in this economic cycle.

An estimate of euro-region gross domestic product for the
second quarter will be released on Aug. 14.

What is the outlook for inflation?

Inflation, which the ECB aims to keep just under 2 percent,
has remained below 1 percent since October and fell to 0.4
percent in July, the lowest in almost five years.

The ECB currently predicts price growth will gradually
strengthen over the next 2 1/2 years, climbing from 0.7 percent
this year to 1.1 percent in 2015 and reaching 1.5 percent in the
last quarter of 2016. It is scheduled to update that outlook in
September.

Policy makers might take comfort from the fact that
volatile energy prices strongly contributed to the drop in
July’s inflation rate. Weak prices have more than offset the
effect of the ECB’s low rates on the economy, and any downward
revision to the current forecast of officials might prompt calls
for further easing.

How is the ECB’s balance sheet review shaping up?

Portugal last week rescued Banco Espirito Santo SA, once
the country’s largest lender by market value, in a 4.9 billion-euro bailout. While the move sparked memories of the euro
crisis, the effect on that country’s sovereign bonds has been
limited so far and analysts say contagion has been contained.
Draghi may still face questions on the impact of the rescue on
the ECB’s Comprehensive Assessment of balance sheets, as the
bailout puts into focus the capacity of the euro-area’s banking
union framework to withstand further bank failures.

What else is on the ECB’s agenda?

The European Central Bank’s own role in sanctions is
focusing the minds of officials. The institution has sought
clarification on whether the units of Russian banks operating in
the euro area may access ECB funding after the EU sanctions,
Bloomberg News reported on Aug. 1. That was after EU leaders
curbed Russian access to bank financing and advanced technology
in its widest-ranging sanctions yet.

In July, the ECB announced a reduction in the frequency of
its rate-setting meetings to once every six weeks as of January
when it starts publishing minutes of the Governing Council
session. Draghi might be asked to shed further light on the
format of these accounts.